New Technologies Spark a Wave of Mergers among the World’s Exchanges
Following the announced merger between the London Stock Exchange (LSE) and Canada’s leading exchange - Toronto Stock Exchange, the market received word of negotiations for another merger between the Deutsche Boerse and the NYSE Euronext. The two mergers between the world’s major exchanges across the Atlantic have sparked a series of cross-border exchange mergers around the world. The LSE’s CEO foresees that the market will consolidate into three to four major international exchanges with worldwide influence over the next 5 years.
Global trend in exchange mergers
Mergers of stock exchanges began as early as 2007. Although discussions were postponed during the financial crisis, they resurfaced toward the end of the previous year and attracted global attention as leading stock exchanges around the world saw this as an opportunity. In addition to the ongoing mergers and deals pending approval from the authority, there were also several turns and surprises over the past year. For example, the merger between the Deutsche Boerse and the NYSE Euronext aroused the interest, and even potential hostile takeover, from the Intercontinental Exchange (ICE) and Nasdaq; but this idea was shelved by the NYSE and objected to by the U.S. government.
In October last year, the Singapore Exchange also announced its intention to acquire the Australian Securities Exchange, but the proposal was rejected 6 months later by the Australian government on the grounds of national interests. After the LSE withdrew its merger with the Toronto Stock Exchange in June of this year, the market was filled with rumors of how Nasdaq, the Singapore Exchange, and the Hong Kong Stock Exchange were eager to acquiring the LSE.
New technologies change the world’s securities exchanges
This wave of mergers between securities exchanges was mainly driven by new technologies and regulatory reforms with regards to derivative instruments and European and American markets, which changed how securities exchanges are run. First of all, advancements in computer networks and communication technologies had provided smaller and low-cost service operators the opportunity to emerge and take away the market share and profitability of conventional exchanges. In order to meet traders’ demands for faster and more complex deal-matching, securities exchanges are constantly required to investing large sums of capital to establish information systems. In an attempt to maintain profitability, securities exchanges resolved to mergers for a quick way of achieving economies of scale, and thereby lowering unit operating costs through sheer volume.
Derivatives are now integrated into an exchange platform
In the past, most financial derivatives were traded over-the-counter instead of securities exchanges, and nearly 30% of stock trades worldwide were packaged then traded over-the-counter. Since the financial crisis, however, many European and American countries had begun integrating OTC instruments into the exchange platform. This movement brought new businesses and growth opportunities to the world’s major exchanges, and gave rise to mergers for handling broader varieties of transactions. Some of whom even proposed to include clearing and settlement institutions into the merger deals in search for vertical integration and one-stop services.
Differences among Asian exchanges may discourage mergers
The capital markets in Asia have continually grown in size with rising transaction volumes that may well compete against the European and American markets; as a result, the enormous market potential made them attractive merger targets to European and American exchanges. However, despite the commercial concerns, the cross-border merger of a securities exchange carries the implication of a sovereignty takeover, which is especially true for Asian countries. Therefore, the ambitions of European and American exchanges in taking over Asian securities exchanges may prove extremely difficult in practice.
On the other hand, the challenges encountered by Asian countries lie in their diverse laws and systems that segregated the capital market into fragments. On top of which there are sovereignty and other factors that do not facilitate mergers between securities exchanges. These differences are not favorable towards product and technological development over the long run, and may cause them to fall behind European and American countries even further.
Strategic alliance provides Taiwan’s capital market with new opportunities
In light of the ongoing cross-national merger between securities exchanges and the reorganization of the capital market, the most critical issues to Taiwan is finding ways to attract companies and capital, and avoid losing competitiveness or being singled out. Chairman Hsueh Chi of the Taiwan Stock Exchange Corporation (TSEC) once commented that TSEC is actively building strategic alliances of material benefits with surrounding countries; in addition to the two MOUs with the Hong Kong Stock Exchange, the TSEC also plans to sign a MOU with Shanghai Stock Exchange, and arrange for the listing of ETF on the Tokyo Stock Exchange and Singapore Exchange. We believe that these cooperative efforts will help the TSEC secure its market position in Asia and the Greater China Region.
In the future, we should expect more integration in the world’s capital market. These integrations not only affect the TSEC’s market significance, but will also impact all who participate in the capital market. Industrialists, government officials, and the academic world should all involve in discussing the responsive measures.
